FedEx profit grows, but fuel is a worry

Merrill Lynch cuts ratings on FedEx and UPS

By

PadraicCassidy

AugustCole

NEW YORK (MarketWatch) -- FedEx Corp. shares fell more than 8% Thursday after the package delivery giant's fourth-quarter earnings rose 9%, but the profit missed analysts' estimates as costs for the startup of a new global-flight route offset growth in its ground unit.

FedEx also said continued startup expenses to support international growth at FedEx Express, the high cost of jet fuel and competition in domestic package shipping would generate earnings below analysts' forecasts in the first quarter of 2006.

Merrill Lynch analysts downgraded not only FedEx shares to neutral from buy on Thursday, but also those of rival UPS
UPS, -1.60%
after the report. "FedEx's slower-than-expected volume growth signifies the economy is growing slower than we anticipated," wrote analyst Ken Hoexter.

FedEx shares fell $7.35 to $80.77 on Thursday.

Shares of UPS also traded lower Thursday. Mediators of contract talks between the shipper and its pilots union ordered a recess in the talks. See full story.

Net income rises

Net income at the Memphis, Tenn.-based company rose to $448 million, or $1.46 a share, compared with $412 million or $1.36 a share a year earlier.

Analysts expected FedEx
FDX, -2.03%
to earn $1.48 a share in the fourth quarter, with revenue of $7.82 billion, according to Thomson First Call.

FedEx said first-quarter 2006 earnings would be $1.10 to $1.25 a share, reflecting "the recent escalation in jet-fuel prices, which are expected to remain elevated during the quarter," as well as a timing lag associated with its fuel surcharge on Express shipments.

Startup expenses associated with a new westbound around-the-world flight at FedEx Express, as well as costs that cut into the fourth-quarter profit, would also continue into the first quarter of 2006.

"I think the higher fuel prices are obviously making customers rethink how they manage their supply chains, and there's some effect there," said Fred Smith, the company's chairman, president and chief executive, during a conference call after the results. "But we're comfortable with our ability to hit our growth targets in fiscal 2006."

Earnings for 2006 would reach $5.20 to $5.45 a share, below analysts' estimate of $5.48 a share.

"We remain comfortable with FedEx given the secular growth trends at ground and international, but today's result will do nothing to reassure investors with regard to the economy," wrote UBS Investment Research analysts in a Thursday note.

FedEx stock is down about 10% so far this year, but is up 3% in the past 60 days. On May 27, the company boosted its quarterly dividend by 14%. See full story.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.